Some of the world’s premier car companies choose Michelin tires, which are known for ultra-high performance and quality; and when Michelin decided to evolve its logistics model, it chose outsourcing provider TNT Logistics North America for the very same reason.

Transformational outsourcing is about building a bridge to the future so the buyer will have adaptability and be able to leverage new capabilities for competitive advantage. When Michelin assessed its business to determine high-impact transformation potential that would increase its odds for winning in a competitive marketplace, its logistics network rose to the top of the list. The costs associated with 18 distribution center (DC)/warehousing facilities throughout North America, as well as nearly 700 employees, and more than 125,000 shipping and receiving transactions processed annually was a heavy burden. Michelin also had legacy logistics systems that were due for expensive upgrades or replacement.

Checking Balance and Tread of Potential Providers

Selected from an initial review of 10 providers, TNT was one of the few with real estate competency to effect a solution for the owned and leased DCs – a key component in the redesign of Michelin’s logistics network.

Bob Brescia, Vice President for Logistics at Michelin, says TNT’s ability to reduce operations costs, rising personnel-related costs, and handling costs was significant; but “getting out from underneath the real estate was a very large piece of the solution.” In fact, Michelin realized a substantial multimillion-dollar cash flow all in one day as a result of selling four of its DCs to TNT. (The initial capital gain / cash flow figure will nearly double after all the DCs are sold.) Brescia says Michelin was able to expand and invest in new areas using the increased cash flow.

Cultural fit of the two companies was a critical element of provider evaluation. TNT shared two important Michelin corporate values: a respect for the facts and a respect for the company’s people. Retaining only a few of its nearly 700 logistics employees (to handle international and domestic transportation, customs and duty drawback functions), Michelin was looking for an outsourcing provider that would absorb the tire manufacturer’s transitioning employees and treat them as they were accustomed to being treated.

“Rarely have I seen a company other than ours have such respect for individual employees and allow all of the employees and managers to prosper professionally and nurture them and mentor them. And they were using the same types of professional development techniques that we were,” comments Brescia.

Strategic Impact

The huge transformational outsourcing initiative is the tire manufacturer’s biggest business transaction since it acquired Uniroyal Goodrich in 1990. The project includes a set of financial incentives which, as Brescia explains, have been very successful. “TNT can be in the red, amber and green areas from the metrics; but if they are above green — platinum — they realize financial incentives. And frankly, we’ve budgeted for that; we want them to be in the platinum area as much as possible, and they have gone into that area several times.”

The incentives have led to several notable supply chain initiatives brainstormed in a joint work group and jointly developed. Among these are dormant, slow-moving and off-grade stock management improvements; reverse logistics; cross-border traffic management; and fleet management. The initiative for dormant, slow-moving and off-grade stock management will generate cost savings by separating these items from fast-moving stock within DCs. “A slow-moving area only takes 25% of the manpower and 25% of the cost because the number of picks is so reduced that it becomes more of a warehousing operation than a distribution operation,” explains Brescia.

Reverse logistics sped up the process associated with customer returns to dealers so that the tire dealers would have the necessary credit to place new orders. Outsourcing has eliminated several days from Michelin’s former function of processing returned tires through the system; the result is increased sales.

Through cross-border traffic management, TNT also applied its best practices in moving tires across the border (Canada to the US, and vice versa), resulting in faster time to market and lower costs.

Through fleet management — using the TNT family of carriers, Michelin has seen a cost reduction and a boost in customer satisfaction levels in the New England region because more shipments arrive on time and with less damage. They are looking at expanding this capability into other difficult geographic regions. Finally, in its supply chain redesign project, TNT identified the optimal places where Michelin’s DCs should be located.

The transformation is enterprise-wide within Michelin North America. In addition to benefits from the supply chain initiatives, value has been realized from the real estate sales, operational cost-downs, and logistics network redesign. So far, this outsourcing relationship has brought increased cash flow, increased cost-competitiveness, reduced capital investment needs, and a redesigned logistics network to Michelin. Brescia says, “It has had a really huge impact on our business and shareholder value.”

Michelin and TNT attend industry conferences and speak about their common bond of unity and trust. It is to the point that TNT intuitively knows what to do and handles operational logistics problems without a request from Michelin. When Michelin had a temporary problem with a customer, for instance, a TNT DC manager met chartered flights in the middle of the night to ensure tires made it to the customer’s destination. During another crisis, the TNT Chicago DC took action on its own to ensure that fire trucks got their tires.

“This relationship is different in its result of partnership, trust and competence between two very, very large companies — much more than I have ever seen in other deals in 35 years of knocking around in logistics,” proclaims Brescia. “I’ve been in some very bad, some good, and some very good relationships; and this one with TNT is the best I’ve ever seen.”

View on Relationship-Building:

“This relationship works, quite simply, because of the level of trust between the parties. There are, of course, legalities and contractual constraints and protections that must be respected; but these are made far less complicated by the level of demonstrative trust between us.”

“There is a very high level of dedication to our common goal. Michelin considers TNT as its premier logistics provider, and TNT considers Michelin as its best customer. We spent two years in the design of, transition planning for, and implementation of this relationship; and the outcomes have all been positive. We both feel lucky that we have such a great relationship.”

“Both of our companies are very honest and ethical in the way we treat business processes, and we enjoy this characteristic in each other. No one tries to pull the wool over the other’s eyes in any way. Any problems that come up are always put in the light of day.”